Loss of trust - an ailment that central bank money can’t cure
“Nov. 30 (Bloomberg) — Money-market rates rose, driving the cost of borrowing in euros for three months to a six-year high, after central banks failed to quell concerns about year-end cash needs and losses linked to U.S. subprime mortgage defaults.
The London interbank offered rate for euro loans rose 3 basis points to 4.81 percent, the highest since May 2001, the British Bankers’ Association said. The increase came even after the European Central Bank today extended the maturity of a regular refinancing operation through the end of the year. The rates for dollars and pounds also climbed.
The ECB, the Bank of England and the Federal Reserve have all offered emergency funds this week to soothe concerns that credit conditions will deteriorate at the end of the year. With banks smarting from more than $50 billion in credit-related losses, central banks are still struggling to encourage financial institutions to lend to each other.
“Central banks don’t have the tools to arrest this rise in Libor because the issue is no longer about liquidity, it’s about credit concerns,'’ said John Wraith, London-based head of U.K. interest-rate strategy at Royal Bank of Scotland Plc, the second-biggest U.K. bank. “If banks aren’t willing to lend to one another, there’s nothing central banks can do.'’
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